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No Mercy / No Malice: AMZN + WFM = $1T

23 June 2017

by

No Mercy No Malice

AMZN + WFM = $1T

Amazon’s acquisition of Whole Foods, should it close, is the white flag (the kind signaling one lap to go, vs. surrender) in Amazon’s march to a trillion. This transaction will be to retail what Facebook’s acquisition of Instagram was to media — the deal everyone wishes they had done. Amazon will reach $1T in value in the next 36 months, at the expense of … everyone.

Consider:

— Amazon / Whole Foods will be the fourth-largest grocer in the US, and will likely post growth rates no $10B+ retailer, sans Amazon, has registered. The Seattle firm will apply its operational chops and lower (zero) profit hurdle to the Whole Foods business model and bring prices (way) down. If you wish you could shop at Whole Foods more often, but it’s too expensive, your prayers have been answered. Whole Foods will become the grocery equivalent of a Mercedes for the price of a Toyota. Grocery has stuck their chin out (little innovation), and the entire sector is about to have its jaw shattered.

— Amazon Media Group will now be able to sell online and offline media. The $1.6B division, overlooked by most analysts despite being 4x the size of Snapchat, will become the fastest-growing, most profitable media business in the world and begin eating into Google and Facebook’s dominance. In addition, they won’t even pretend to work with agencies, in contrast to Facebook and Google, who pet agencies on Cannes’ beaches as they slowly euthanize them.

— Amazon will displace Apple as the top tech hardware innovator, with Alexa cementing itself as the gadget that defines the decade (post iPhone). Grocery / commerce via Alexa will create the utility that Alexa needs to maintain its lead over Google and Apple’s home / voice offerings as they try to play catch-up.

Amazon has warehouses within 20 miles of 45% of the US population. It will soon have an additional 446 warehouses, including in 32 states where Amazon has not yet established a grocery presence. However, these are warehouses (Whole Foods stores) that also make money.

— Amazon will use Whole Foods as an additional benefit of Prime, and more households will have Prime than cable TV within three years.

— The entire grocery industry is, since last Friday, a sea of regret as boards met over the weekend to ask their CEOs, “Why the fuck didn’t we buy Whole Foods, trading at multi-year lows?” As grocery players realize they’re impotent to respond, CPG firms will begin to realize this is likely worse for them. Amazon now has the full toolkit (user reviews, voice, same-day fulfillment, trust, cheap capital) to conspire with 300M consumers to starch the margin from brands.

— P&G, Unilever, Nestle, and Conagra should recognize they’re no longer competing with each other and form a consortium to present a counterbid for Whole Foods. It likely won’t work (see above: Amazon has cheap capital), but they should make Whole Foods more expensive for Amazon.

— The advertising industrial complex and the media sector will also begin wondering if this puts pressure on their business. Yes, it does.

So … What Next?

— Whole Foods is a role model for merchandising, curation, and in-store experience. Operationally, it’s a shitshow, and even Amazon will likely struggle with the complexity of stores.

— Amazon will shore up their brick-and-mortar competence, and dominance of affluent homes, and acquire Nordstrom or Macy’s. Nordstrom is the better option as it’s local, in Seattle. However, it’s family controlled, which means decision making is dysfunctional.

— Amazon will breach $2,000/share in 24 months. Soon after, as consumers find their neighbor / dad / aunt no longer has a job courtesy of Amazon, a state District Attorney will realize the fastest path to the Governor’s Mansion is to go after Amazon and will call for a breakup.

In sum, great for Amazon shareholders and consumers … bad for everyone else. AMZN + WFM = $1T = mind blown. This. Is. Big.

Life is so rich,
Scott

  • Dale Vivian Ross

    I love reading your work and also love your tagline :D. Looking forward to your continued contribution to the industry.

  • Robert

    Scott super duper analysis. Especially how you end it. Amazon’s dominance will become so significant that they will have to be broken up. Same as it happened 25 years ago with ATT and their Bell Operating Company. Their dominance was so profound it lead to their breakup and the creation of the Baby Bells. Amazon’s predatory, systematic and take no prisoner approach will eventually lead to their breakup. Just about the time we are all unemployed.

  • Tim

    Scott, wonderful breakdown as always. I look forward to these in my inbox every Friday afternoon. Really helps ward off the wordy day doldrums.

  • It helps when you have 763 million + mobile users across your entire ecosystem. Understanding customers at scale, and engaging them at scale matters … especially when you want to bolster both share of wallet and your ability to convert customers of one business unit to customers of a new business unit.

  • alex

    Nice. But I was actually hoping to read about Abilify and glass dildos. Maybe next week.

  • Prof. Peabody

    This article strikes me as patently ridiculous. Lower costs and greater efficiencies *should* yes, lead to a lowering of prices. But when in the entire history of capitalist endeavour has that actually happened? Amazon will of course keep the profit for itself.

    Whole Foods is currently successful with the prices they have, any efficiencies gained by being absorbed by Amazon will of course be kept by Amazon. If there is one thing Amazon is known to be, it’s a company that doesn’t give a rats behind about it’s customers or any of it’s partners especially when it comes to money.

    Also, Amazon will gain these “efficiencies” through spreading of it’s awful anti-consumer, anti-worker practices to Whole Foods workers who are currently treated rather well. The “efficiencies” will be in LOWERING wages for workers, REDUCING workers shifts, BULK buying of LOWER QUALITY food, and reduction of workers SAFETY.

    This article reads like an Amazonian love-fest. The only thing this merger will be good for is Amazon and their investors. The actual customers and the people that work there are about to get completely screwed over in the same way as all of Amazons workers are.

  • mariapetrova

    From stuff I’ve seen / read by Scott, he agrees with you much more than you realize. Rather than a love fest, it’s more of a shock at how they’ve been able to accomplish such a takeover. It’s smart; you’ve got to give them that. It’s a dream for any business not to be beholden to investors but to put every penny toward development — hopefully a model other firms can emulate to some degree. So much innovation can happen without the pressure of quarterly gains, and it doesn’t require cost-cutting to show profit.

    But Galloway is super aware of the socioeconomic implications of “efficiencies” / capitalism at this scale. He’s constantly reporting how few employees Amazon needs to make a million, vs. the giants of past decades, and how that’s not good for society. And of all the analyses I read this week (10-15 articles), none mentioned a possible breakup / monopoly / federal or state legal action against AMZN. As a European & a book lover, oh I hate Amazon… until I need a petty little thing within 2 hrs. It’s awful, and it’s amazing. I do have a B&N membership though #doingmypart #needbookstores

  • winstonsmith39

    “Amazon will displace Apple as the top tech hardware innovator”

    Post iPhone? Please enlighten us as to what’s going to replace the smartphone as the central device in so many people’s lives – because it won’t be a cylinder tethered to their house.

    Amazon will also have to make better hardware first if they are going to get anywhere near Apple. The Echo isn’t even close to being desirable in the way many Apple products are.

  • handleym

    There are a number of IMHO unmotivated statements here, things that sound good until you think for a few minutes. For example:

    – “Amazon will use Whole Foods as an additional benefit of Prime”
    Elaborate on that. What exactly do you envisage here? Belonging to Prime gets you 5% discount at Whole Foods (so it’s sort of like Costco)? Can Amazon even afford that (sure they’re willing to reduce profit, but there isn’t 5% of profit to give away in the grocery business).
    And if the discount is 1%, what’s the point? No-one’s going to buy Prime just for that, and you’re just giving away 1%, for no return, to people who have Prime anyway.

    – “Amazon will displace Apple as the top tech hardware innovator, with Alexa cementing itself as …”
    There are probably at least 4x as many Apple Watches out there as Alexa units. (Apple sells around a million aWatches a month, more in certain months and increasing since it first shipped; there are about total 11 million Alexa sold since it was released).
    One reason Alexa is not (and has not been) especially interesting to those within the Apple eco-system is that it’s mostly a less convenient version of what the watch can do. Set timers, unit conversions, control the lights, all the usual Alexa highlights can be done just as easily with Siri on a watch.

    My point is not to start an argument about why Siri is better than Alexa or vice versa, it is to point out that you’re misinterpreting the world. You see the market of relevance as “cheap smart speaker” and say Apple has nothing in that space. But the ACTUAL market of relevance is “simple-minded easily available voice UI” and Apple has that covered just fine. To insist that the speaker form factor is somehow a magical place to be, more relevant than the wrist (Apple Watch), or in the ear (Airpods) you’re going to have to provide serious data because I don’t see any reason to make such an assertion.

    I agree with you that groceries were ripe for upending, and that this move by Amazon is significant. (For example, ALL RETAIL five years ago should have installed free no-login per-shop WiFi along with associated software providing maps and allowing me to find everything in the store — a substantial reason I often go to Amazon is simply that I don’t know where the local store carries mothballs or some other weird item that I don’t buy very often.)
    But your extrapolations beyond these facts of the relevance for retail strike me as unfounded and likely incorrect.

  • musicandwords

    “Amazon will breach $2,000/share in 24 months.”

    You are assuming that the long in the tooth stock bull market will continue, which is a big, big assumption. It’s about to end. If we enter a bear market, the Amazon share value could be halved.

  • Scott Galloway

    A distinct possibility. Also, both could happen.

  • Scott Galloway

    build into prime–free delivery, loyalty program, prime members can pick up stuff at stores if easier (often is if you don’t have doorman), etc.

    Re displacing Apple as hardware innovator, yes (should have bound the statement). Apple likely to remain innovator of our generation re Hardware, but I’d argue for ’16 and ’17 Alexa has had more impact (and generated more stakeholder value) than either the Apple Watch of AirPods.

    Yes, I extrapolate and misinterpret the market…all…the…time…

  • Scott Galloway

    Fair point,

    copying from post above:

    Re displacing Apple as hardware innovator, yes (should have bound the statement). Apple likely to remain innovator of our generation re Hardware, but I’d argue for ’16 and ’17 Echo/Alexa has had more impact (and generated more stakeholder value) than either the Apple Watch of AirPods.

  • Scott Galloway

    PATENTLY

  • Scott Galloway

    thx Tim

  • Scott Galloway

    I need to learn more about anti-trust,,,don’t know much about when/how companies are broken up.

  • Scott Galloway

    Thx Dale

  • Looks like you’re an Amazon bull, Prof! I’m with you on this one. Bezoar looks like the genius he actually is.

  • Vasilij Savin

    Any facts to justify such a bold claim? Apple hardware is top notch and its silicon teams are starting to outperform even Intel. Amazon is a service company, not a hardware one. It is impossible to be good in both due to differences in culture needed.

  • David Randolph

    Facinating analysis. I forsee checkout lines disappearing, big-data-driven product curation, smaller stores, and cheap delivery for Prime members. Products will start to come in square/rectangular boxes for stacking and packing. Private label will take down the CPG empire.

    I think we will arrive at Amazon Foods and have a cart waiting for us with 75% of our shopping items selected and picked by A.I. and automation. This would include ingredients for recipes we have have selected (week’s menu), and tedious replenishment items like toilet paper and shampoo. The last 25% of our grocery carts would be the fun, spontaneous items like treats, bakery or deli.

    A 45 min slog to the grocery store turns into 10 mins of moderate amusement. And at lower cost.

  • Tobias Schill

    Thanks a lot for sharing these views and although this makes all sense – looking at the retail market seems to me also a matter of having just the right size/approach for a local market. I won´t say it does not work for grocery – but honestly grocery is a very very local game. I can imagine that what you are describing may work for a single mononlithic large economy like the US but for example EU is a completely different game – where even retailers like ALDI with extreme concepts and trying to balance quality/price at the lowest levels saw their concepts limited because of market specifics. In Germany companies like GAP, M&S, Sephora – all tried their concepts and all failed as they just tried to replicate concepts working “elsewhere” – so I am curious what you see as a global strategy for this going forward (buying local heros does not scale in my point of view). Balancing country specifics whilst maintaining a scalable, proftiable standard is the challenge.

  • Amazon products are efficient and with a good price. At the same time, they have an only “good-enough” design. No sophistication, no magic. Will the high-end market and the Whole Foods user feel comfortable with Amazon?

  • Yoda

    At which point, buy buy buy, I will.

  • Stew Farr

    So which car company will they buy?……. 🙂